Adapt or Perish: Evidence of CEO Adaptability to Industry Shocks

47 Pages Posted: 20 Mar 2013 Last revised: 6 May 2018

See all articles by Wayne R. Guay

Wayne R. Guay

University of Pennsylvania - Accounting Department

Daniel J. Taylor

Wharton School, University of Pennsylvania

Jason J. Xiao

University of Rochester - Simon Business School

Date Written: April 3, 2015

Abstract

Prior turnover literature documents that poor performance leads a board of directors to terminate the CEO, but does not explore the underlying causes of the CEO’s poor performance. Recognizing that terminated CEOs have often been successful earlier in their tenure, we conjecture that changes in a firm’s business environment can cause the board to decide that the existing CEO’s skills do not fit with the firm’s current leadership needs. Our results suggest that CEOs struggle to adapt to industry shocks related to investments, growth opportunities, and product markets, and that the well-documented relation between firm performance and CEO turnover depends on these industry shocks. We also find that the relation between industry shocks and CEO turnover depends on various features of corporate governance and whether the CEO is identified as having “generalist” skills. Finally, we document that adaptable CEOs command a pay premium and that turnover among other top five executives is a complex function of industry shocks and the turnover decision regarding the CEO.

Keywords: CEO adaptability, strategic industry shocks, CEO turnover, top management turnover, CEO entrenchment, agency

JEL Classification: G34, M40, M41

Suggested Citation

Guay, Wayne R. and Taylor, Daniel and Xiao, Jason J., Adapt or Perish: Evidence of CEO Adaptability to Industry Shocks (April 3, 2015). Available at SSRN: https://ssrn.com/abstract=2234886 or http://dx.doi.org/10.2139/ssrn.2234886

Wayne R. Guay (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Daniel Taylor

Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jason J. Xiao

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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